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Best-Laid Business Plans Cover Both Daily Operations and Future Shocks

April 29, 1998

Developing the operations of a business and including them in a business plan may seem like a snap to most business owners, who believe they already know all there is to know about running their business.

But operations planning should go beyond normal day-to-day functions and include contingency plans for times the business doesn't work as it's supposed to.

Even a seasoned small-business owner can be caught by surprise by natural disasters and by supply and production problems. A savvy owner uses the planning process to develop alternative steps ahead of time, instead of in the middle of an emergency.

"Business owners should keep in mind Murphy's Law: 'If anything can go wrong, it will,' " said Debra Esparza, director of USC's Business Expansion Network.

Problems typically fall into two categories: in-house management error and conditions that are outside the business and beyond the owner's control.

Owners may blame external factors such as supply problems ("My supplier didn't deliver the raw material in time") or production problems ("The machine broke"). But blame doesn't lie outside the business. It lies with the business owner who failed to anticipate setbacks and have a backup plan.

For example, supply problems can be reduced if owners stay apprised of whether the supplier can deliver as promised, if the owner has a schedule with a built-in buffer for delays and, if necessary, has a backup supplier.

Delays for broken machinery can be avoided with routine maintenance and by creating contingency plans, such as identifying substitute machinery in another locale or possible rentals.

Here in Southern California--where fires, floods, earthquakes and civil disturbances have all hurt businesses--some owners believe disruptions are unavoidable. But earthquake and disaster planning should be part of any business operation planning, including such measures as having off-site records backup, employee home phone numbers, and safety procedures to prevent or limit physical damage to inventory or equipment in a disaster.

In contingency planning, consider what is most crucial to the continued operation of your business, Esparza says. What parts should be protected? These parts of your business operation are the ones for which you should have the most extensive alternative plans.

Professionals who examine business plans for financing often want to know if the business has taken the necessary steps to protect the potential lender's investment. They look not only at contingency plans, but also at whether the operating basics are in place.

What are those basics?

Labor, materials and machinery or equipment. How you obtain and deploy them are the cornerstones of your business operations.

When evaluating your labor needs, rather than focusing on individual positions within your work force, you need to consider the types of skills or qualifications necessary to operate the business and the number of hours it will take a given number of people to produce your goods or services.

"I've seen business plans with operations sections in which management decides a business can bake 1,000 cookies a week, but the sales projections call for selling 100,000 cookies a year," Esparza said. "The math doesn't match."

That doesn't necessarily mean the business itself won't work. The business owner simply needs to revamp operations, perhaps add a second shift or new machinery to boost cookie production to meet sales of 100,000.

Your business features will determine how you will handle materials. For example, if your company competes on a short turnaround time, you'll have finished products or parts that are in stock or easily accessible. If low price is a feature, then materials obtained at the best price will be your priority and a full inventory will matter less to you.

Similarly, machinery--where you obtain it, how it works and how long it will last--will match the features of your business.

Esparza cites the experience of Food From the Hood, a youth-owned-and-operated food-processing company at Crenshaw High School in Los Angeles. The company had been selling salad dressing in retail-sized bottles but found that institutional buyers were interested in placing orders.

That meant the company had to determine how many employees it would need to add to fill the larger orders, what kinds of bulk-sized containers it needed to package the dressing, and whether its equipment could be modified to process the larger orders and handle the bulk containers.

"They basically had to rethink their manufacturing process," Esparza said. "They figured it all out and broadened their target market."

Exercise: List the labor, materials and equipment you will need for your business and where you will obtain them. Then list five to 10 things that could go wrong in your business and begin developing backup plans.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Entrepreneurship 101

Chapter 1: HOW TO CHOOSE A BUSINESS

Chapter 2--HOW TO START A BUSINESS

Chapter 3: HOW TO DEVELOP A BUSINESS PLAN

- Know the Value of a Plan

- Create a Management Team

- Define Your Products or Services

- Develop a Marketing Plan

- Master Operations

- Draft a Financial Plan

Chapter 4: HOW TO FINANCE YOUR BUSINESS

Chapter 5: HOW TO GROW YOUR BUSINESS

The Bottom Line

"Entrepreneurship 101" is a tutorial on how to choose, start, finance, plan and grow a business. The program, written by Times staff writer Vicki Torres, was developed by Debra Esparza, a faculty member at the Entrepreneur Program of the Marshall School of Business, USC. Esparza also heads the USC's Business Expansion Network, a community and economic development that has counseled more than 5,000 small business owners in the Los Angeles area over the last six years. BEN provides help with financing, business planning, accounting, marketing and other aspects. The tutorial also can be found on The Times' small-business Web site at http://www.latimes.com/smallbiz.

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